As I was sifting through this morning’s countless headlines, I came across a small biopharmaceutical firm making big news. You won’t read about this on the front page of The New York Times, but it’s essential information for any small-cap investor who’s interested in striking it big in the often-confusing world of prescription drugs.

Here’s a shining success story that shows a lot of money can be made by investing in small-cap pharmaceuticals. Take Amgen (NASDAQ: AMGN) for instance, which makes drugs that treat rheumatoid arthritis and infection and anemia in cancer patients. This stock was trading for $14 in the summer of 1998. It’s trading for around $75 now.

On top of that, my research zeroed me in on a unique indicator that sends your chances of hitting a home run in the biotech and pharmaceutical industries from 1 in 1,000 to a whopping 62%…

Nuvelo Inc. (NASDAQ: NUVO) — a $658 million biopharmaceutical outfit — announced early this morning that the FDA granted it “fast track” designation for alfimeprase, a drug being developed for treating acute peripheral arterial occlusion (PAO).

Investing in Prescription Drugs: Leg Attack

An acute PAO, or a “leg attack,” happens when blood flow to a lower limb is blocked by a clot. According to Nuvelo, this affects more than 100,000 people in the United States each year. Check it out…

“Acute PAO is the result of underlying peripheral arterial disease, in which chronic fatty plaque buildup restricts blood flow and is then complicated by the formation of an acute clot. If blood flow is not restored quickly, leg attack can lead to permanent nerve and muscle damage, gangrene and, in the most severe cases, amputation and death.”

Without diving too much deeper into medical terms, the drug is designed to dissolve these clots in the legs that clog catheters used in surgery.

Nuvelo is attempting to corner the market on this particular treatment. Currently, there are no FDA-approved therapies available to treat acute PAO, although there is some off-label use of certain drugs to occasionally deal with the problem, according to Nuvelo.

And stockholders have reacted to the positive news coming from Nuvelo. The stock has shot up dramatically following a few previous announcements this month. Adding in a little premarket action, Nuvelo was trading around $16 before the bell this morning. That’s double its price since the end of December.

On Jan. 9, the AP reported that Nuvelo expected to start two additional late-stage studies of its “experimental blood-clot buster” in the first half of 2006.

The week before, the company announced that drug maker Bayer AG would become its partner in the drug and said it will complete patient enrollment in two ongoing trials in the second half of 2006 and start two more before July. Nuvelo also plans to expand its clinical testing of an experimental cancer therapy and start a study of another potential cancer drug this year.

Not bad for this small-cap biopharmaceutical outfit…

Investing in Prescription Drugs: A Drug on the Fast Track

But what really got me thinking that this is a company that should be on your radar was the fast track designation. Does fast tracking a drug really mean it has more promise and will end up on the shelves faster than usual? And even more importantly, what does this ambiguous designation really mean for Nuvelo and its shareholders?

On the surface, fast track designation is everything you’d expect it to be. The term was coined in the FDA Modernization Act of 1997 in an effort to — you guessed it — speed up the approval process for some worthy causes. The designation is reserved for new drugs that could address unmet medical needs and treat serious or life-threatening conditions, according to the FDA.

Using the fast track status, companies can get early consultation with medical reviewers and file certain portions of new drug applications in advance of an entire application.

Of course, there’s the usual government quagmire associated with the approvals, but this is the case with any drug looking to get approved for public use. But here’s the rub: While fast tracking a drug does put it on the path to possibly being introduced faster, it’s still not a guarantee that the drug will be approved — ever.

If a drug company were to introduce a drug to the FDA that claims to be able to cure diabetes, it could probably be granted fast track status, since diabetes is so prevalent and there is at this time no other drug that can claim to cure it.

However, a study currently under way at the Tufts Center for the Study of Drug Development says that the FDA’s fast track program results in a 62% approval rate after the first three years. This may sound like forever, but the length of the total drug testing and approval process is conservatively estimated at 12 years.

Here’s a breakdown from Alliance Pharmaceutical:

Preclinical testing involving laboratory and animal studies takes about 3½ years. Then come the clinical trails, which have three phases. Phase I takes about a year and involves testing the drug on healthy volunteers to determine safety and proper dosage. Phase II involves patient volunteers and takes about two years. This is when doctors look for side effects the drug might cause. Phase III takes three years and is much like Phase II, except that doctors also monitor patients for long-term problems that could be associated with the drug.

Alfimeprase is now in Phase III of its clinical trials — and here is where we can see the fast track designation working its magic. Because the drug has been granted fast track status, it can submit application material early  to the FDA, before the third phase of the trials has finished.

Investing in Prescription Drugs: Things to Remember About Drug Approval

If and when the drug is approved by the FDA for public use, the testing never really ends. The FDA requires companies to follow up on drug progress even after approval.

While the fast track designation does say something about the promise of the drug, it’s still no guarantee. This does show Nuvelo’s innovation in creating this important drug to treat a problem that affects so many people…but it’s also important that the company is knee-deep in other projects as well — mainly, its cancer medications mentioned earlier.

Just as important for the company is its partnership with Bayer in the development process. And even though it’s easy to get caught up in the hype of the idea that a drug could hit shelves sooner than expected, it’s always important to consider the thousands of other factors that could propel Nuvelo to be an industry leader — or stop the company in its tracks.

 And remember one more thing: Out of every 5,000 compounds evaluated in preclinical testing, only five make it to the clinical trial phase. Of these five that enter trials, just one is approved for public use by the FDA.

Sometimes, this is a risk worth taking.

Until next week,

Gunner
January 23, 2006

Investing in Prescription Drugs: A Fast Track Indicator was originally featured in the Penny Sleuth.